Finding Purpose Through Disaster

On October 17, 1989, a disaster struck California. The 6.9 magnitude Loma Prieta Earthquake killed 63 people and collapsed a section of the upper deck of the Oakland freeway. The earthquake caused millions of dollars in damages, of which the effects are still being felt in the San Francisco Bay Area.

On that same day, 19-year-old dental assistant Michele Harris was diagnosed with a brain tumor. The diagnosis felt as earth shaking as the 6.9 magnitude earthquake. Michele felt her life was over.

Reeling from the devastating effects of the earthquake centered so close to Michele’s home in Corralitos, her life felt as shattered as the infrastructures around her. Luckily, the strong support of her family, friends, and the vital resources of the UCSF Medical Center, including one of the world’s most prominent brain surgeons, were readily available to provide comfort and healing to her in the midst of chaos.

New Purpose

This became a pivotal time in Michele’s life. She not only survived the surgery, but her brain tumor was successfully removed, and she was well on her way to living a normal teenage life. Michele began to take a new look both in and outward toward the next steps of her life. Feeling the sheer joy of living, sparks flew, her spirit barely contained. She left the dental field and pursued a new career in healthcare that would provide a purposeful path forward.

Understanding the uncertainty a person and family goes through while waiting for a diagnosis or treatment, she wanted to help patients and their families during those difficult times. Using both the triumph over the earthquake and tumor as metaphors, they gave Michele’s life a new purpose. She let neither the Loma Prieta Earthquake nor her brain tumor get the best of her.

The most compelling and inspirational sights she witnessed during those tent-city days of post-Prieta were the unflinching works of the Red Cross and other social service organizations that mobilized to feed the hungry, provide shelter and basic needs for families, and countless other silent and selfless acts of generosity and humanity. Simple acts by men and women of all races, creeds, and ages gave a glimmer of hope and belief that maybe tomorrow will be a better day. Seeing the tremendous efforts exerted by volunteers, who gave their all for others, with nothing asked in return, Michele resolved to become the best person she could, no matter the challenges.

Giving Back

Michele’s work gave her several opportunities to give back to the community in a way that Michele sees success – bringing the right people together to achieve a common goal. “It’s a out collaboration and partnerships and those amazing people you surround yourself with. I love connecting people to make great things happen,” Michele says. Michele was attending a Gilroy Rotary Club meeting, listened as the Master Gardeners of Silicon Valley presented their beautiful projects, and heard their need for more space to garden. Michele’s love for gardening naturally made her want to help, and she worked with Saint Louise Regional Hospital in creating the South County Teaching and Demonstration Garden on the Saint Louise campus. Together they worked on fundraising for irrigation and other supplies to make the garden prosper and brought in the community to enjoy it – not only those who donated – but those who seemed to need it most, from the homeless to those who were recovering from illnesses. The food grown in the garden is donated to a local family service center.

The Blessing of Mentoring

Seven years into Michele’s new career in healthcare, she was promoted to the CEO of the Foundation at Saint Louise Regional Hospital where she became very familiar with the Board of Directors. Mr. George Chiala Sr., who was the chair of the board, became a pillar of Michele’s life. Chiala and his family were innovators in the ever-growing farming and agrarian industry in the area. Chiala was both a philanthropist and a force for positive change in people’s lives within the community. Ms. Averill and Mr. Chiala became fast friends and, more importantly, Chiala took Averill under his mentorship wings.

Michele had survived the earthquake, the brain tumor, and under Mr. Chiala’s tutelage, she would have the strength of character to grow while helping other people. They both shared the same passion for becoming catalysts for positive changes in other people’s lives.

Expanding Opportunities to Serve

Michele left healthcare and moved to her current position as CEO of the Central Coast Chapter of the American Red Cross. Michele saw the unselfish efforts of the volunteers of all stripes, colors, and ages in her new work. She loves to share how the amazing cadre of volunteers performed selfless acts for others. Michele often wrestled with a question about their volunteers: “What makes the first responders, such as the police, fire, or EMT, run in to burning buildings and put their lives at risk? What makes a person volunteer day in and day out for the sake of giving others hope? The spirit that a better day is coming.” Their reckless abandon was inspirational. In fact, 96% of the Red Cross workforce are volunteers. Amazing, remarkable, and inspirational people whose dedication and resiliency are contagious.

Michele loves hosting events to bring the community together. One of the most successful events is the Farm to Table Dinner. With an amazing group of local chefs donating their time, resources, and talent to the event, Michele organized the Annual Farm to Table Dinner at Carmel Valley Ranch. The goal was to help people learn about their local Red Cross chapter and the variety of services available, all while having a phenomenal meal. The event helps build relationships and connect people together.

Overcoming Adversity to Serve Others

The mentorship skills that George Chiala nurtured and grew within Michele gave her the ability not to limit herself, but to constantly improve upon her natural abilities and to prove to herself that the struggles she experienced only made her stronger. The mentorship gave Michele that chance to impart a legacy of her own, about making a difference in other people’s lives.

Michele works every day at the Red Cross. That cooperation goes beyond what most people think — of bringing disaster relief and blood supply — and extends to so much more, helping families of the armed forces and restoring family links

“It’s an honor and privilege to help the Red Cross provide support to our three counties,” Michele says. “Having the opportunity to do this kind of work with such a tremendous corps of volunteer and paid staff makes it especially rewarding.”

Michele adds that the many individuals, businesses, and corporate partners providing support to the Red Cross play an essential role in the organization’s success. “The resources we are able to provide during periods of greatest need only happen because of the generosity of our donors and volunteers. We could not do our work successfully without first building effective partnerships with community members, donors, and local agencies.”

When Michele was asked what she wanted her legacy to be, she knew it would not be financial, but rather one that was more of an emotional impact. Michele’s legacy is one where the people in her life and community know that she cared, that they can make a difference, and together they will make a community stronger. Michele found the greatest joy in believing in people and their abilities and helping them believe it for themselves. A legacy is not necessarily about leaving material items behind for people; it’s about instilling a belief that resides within people.

Michele’s legacy is one of compassion and caring, a legacy she learned through the values her parents, family, and friends instilled in her, and through surviving her own health battle. It is a legacy of inspiration and heart, of which George would be proud and would want others to be inspired to serve as well.

Multi-Factor or Not Multi-Factor? That Is the Question

Let’s pretend you are a US investor that wants to deploy some of your money overseas. You think international developed market stocks are attractive relative to US stocks, and you also think the US dollar will decline over the period you intend to hold your investment. Your investment decision is logical to you. But you have choices: You could a) simply invest in a traditional index like the MSCI EAFE, b) invest in a fund that systematically emphasizes a single factor (like a value fund) that only buys specific stocks related to that factor, or c) invest in a developed fund that blends several factors together, like the JPMorgan Diversified Return International Equity ETF (JPIN). What is the best choice?

Investing in a traditional international market capitalization index like the MSCI EAFE is not a bad choice. It has delivered nice returns for a US investor, especially uncorrelated outperformance in the 1970s and 1980s, and helped to diversify a US-only portfolio.

Your second choice is to invest in one particular factor because it makes sense to you. Sticking with the example of a value strategy, you might believe a fund or index that chooses the cheapest or most attractively valued stocks based on metrics like Price to Earnings (PE) is best.

You could go find a discretionary portfolio manager who only buys stocks he deems to be cheap. Typically the concept of “cheap” is based on some absolute metric that the manager has in mind, such as never buying a stock with a PE greater than 15. If there are not enough stocks that are attractive, he will hold his money in cash until he finds the prudent bargains he seeks. This prudence also obviously risks possible underperformance from being absent from the market.

The alternative is to buy a value index or fund that systematically only buys the cheapest stocks in a particular investment universe. So if there are 1000 investable stocks available, the index ONLY buys the cheapest decile of 100 stocks and is always fully invested in the 100 securities that are relatively cheapest. This is an investment approach that a discretionary manger may disdain. The discretionary value manager may look at those same 100 stocks and think they are pricey. But nevertheless, academic research has shown that always being fully invested in the relatively cheapest percentiles of stocks in the US has produced superior returns over many decades.

Such a portfolio is called a “factor” portfolio. Why the name? In the early 1960s, academics introduced the concept of beta and demonstrated that individual US stocks had sensitivities to, and were driven by, movements in the broad market. In the early 1990s, academic research began to show that other “factors” such as value and size also drove US stock returns. Since then, several factors have been identified as driving individual stock outperformance: value, size, volatility, momentum and quality. Stocks that are cheaper, smaller, less volatile, have more positive annual returns and higher profitability have historically outperformed their peers. It turns out these factors also work internationally.

Of all the factors, value is the factor that has been the best known the longest (even before it was academically identified as a “factor”), thanks to the books of Warren Buffet’s teacher Ben Graham. And if you look abroad at an array of developed global markets and create a value index and compare it to its simple market capitalization weighted brother, the historic outperformance of value has been stunning. Until recently.

While there was some variability by country, on average from the mid-1970s up until 2005 a value factor portfolio in a developed market outperformed its market cap weighted index by about 2% a year. That’s a lot. By contrast, since 2005, the average developed country value portfolio has underperformed a market cap indexes by about -40 basis points. Which is the danger of investing in one factor. It may not always work at every point in time.

So if investing in one factor like value runs the risk of underperforming, how about a multi-factor international developed equity portfolio?

Below is a breakdown of individual factor portfolios’ performance in international developed equity markets since 2005, an equal weighted factor portfolio as well the performance of the MSCI EAFE as our performance reference. Note that, for the last 13 years, value has been the poorest factor by far, while the others have handily beaten the EAFE. An equal weighted portfolio of all 5 factors, while not as optimal as some of the individual factor results, beats the EAFE by 1.6% and has an information ratio, or risk adjusted returns that are superior by 37%. The equal weighted factor portfolio also has the advantage of not having to predict which factor will work when, so even when a factor like value does not beat the market, the other factors can pick up the slack.

SOURCE: MSCI, Data as of January 31, 2018. Past performance is no guarantee of future results. Shown for illustrative purposes only.

The equal weighted factor portfolio has one other advantage over the market cap weighted alternative. Note in the chart below how well the portfolio outperformed in the 2008 crisis, so it tends to do relatively well in highly volatile sell offs.

SOURCE: MSCI, Data as of January 31, 2018. Past performance is no guarantee of future results. Shown for illustrative purposes only.

While it’s not inconceivable that one or two of these factors could erode, or underperform for a stretch, the fact that you have exposure to multiple factors in a portfolio that seems to do especially well in crises suggest the multi-factor blended portfolio remains the most attractive way to invest in developed markets.

So, when asked the question: Multi-factor or not multi-factor? The data speaks for itself.

DEFINITIONS: Price to earnings (P/E) ratio: The price-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings.

DISCLOSURES: MSCI EAFE Investable Market Index (IMI): The MSCI EAFE Investable Market Index (IMI), is an equity index which captures large, mid and small cap representation across Developed Markets countries* around the world, excluding the US and Canada. The index is based on the MSCI Global Investable Market Indexes (GIMI) Methodology—a comprehensive and consistent approach to index construction that allows for meaningful global views and cross regional comparisons across all market capitalization size, sector and style segments and combinations. This methodology aims to provide exhaustive coverage of the relevant investment opportunity set with a strong emphasis on index liquidity, investability and replicability. The index is reviewed quarterly—in February, May, August and November—with the objective of reflecting change in the underlying equity markets in a timely manner, while limiting undue index turnover. During the May and November semi-annual index reviews, the index is rebalanced and the large, mid and small capitalization cutoff points are recalculated.

Investors should carefully consider the investment objectives and risks as well as charges and expenses of the ETF before investing. The summary and full prospectuses contain this and other information about the ETF. Read the prospectus carefully before investing. Call 1-844-4JPM-ETF or visit ww.jpmorganetfs.com to obtain a prospectus.